Currently, a significant issue in the business sector is the problem of late payments between purchasers and vendors. Vendors incur both risk and cost in permitting purchasers extended time to settle. Legislation introduced to resolve the issue has been unenforceable in practice. Historically conventional bills of exchange and letters of credit have been utilized to accelerate access by a vendor to the proceeds from a sale by either endorsing a bill of exchange received to the benefit of its own vendors or by discounting the bill or letter of credit to cash. The legal, accounting and transactional processes are slow, time consuming and are not cost-effective, especially for high frequency settlement and for smaller amounts. Furthermore, conventional bills in particular are of variable and often unreliable quality, reducing their acceptability as a means of settling indebtedness. In consequence, bills of exchange and to a lesser extent, letters of credit, have fallen out of favour and are mostly only used for cross-border business and within a limited number of industries such as timber.
Existing methods of electronic bill/invoice presentment and payment (known as either EBPP or EIPP) only interface with the world of money. They rely upon banks and inter-bank settlement systems to move value between a vendor and a purchaser. These money-based systems suffer from delays and often excessive costs, especially for the rapid execution of settlement between vendor and purchaser. Furthermore, rapid money transfer methods are inappropriate for the transmission of smaller and particularly micro-amounts.
Bills of exchange and letters of credit payable are classified for accounting purposes as notes payable and are grouped, for balance sheet reporting purposes, as trade payables. The US Securities and Exchange Commission (SEC) is requiring that schemes for the third party financing of inventory and other trade purchases based on promissory notes such as IOUs be classified as loans and not trade payables on the balance sheet of purchasers. Bills of exchange are considered not to be affected by the recent SEC guidance. This has resulted in the need to update the traditional, paper-based bills of exchange method of settlement. Alternative methods of settlement are required whereby the purchaser provides advance funding to the vendor, taking full account of current methodology.
Currently the drawing and acceptance of a bill of exchange/letter of credit is a separate process from the process of approving purchase invoices for payment. The whole process is complex, leading to time delays and excessive costs. A fundamental disadvantage of the current solution is that the bills which are drawn and accepted are not only paper based but are wholly incompatible with an electronic bill of exchange.
Current electronic settlement solutions, such as Orbian which was introduced into the US in 2002, require methods of storing and transferring value requiring two separate instruments (a) to record the indebtedness of a purchaser to an intermediary in the form of extinguishable debt such as a promissory note or Primary Orbian Credit; and (b) to record the indebtedness of the intermediary to the vendor in the form of a further promissory note or Orbian Credit. Both known instruments are more likely to be classified for balance sheet purposes as loan notes payable or receivable rather than as trade payables or trade receivables. Such classification, from the purchaser's viewpoint, results in an adverse gearing effect.
Individual businesses as separate legal entities conventionally maintain their own individual accounting systems wherein many accounting documents are entered more than once and separately into each system. This leads to inefficiencies and error with consequent problems of reconciliation between contracting and interacting parties.
Communication between separate businesses is traditionally by means of telephone, letter, fax and email. Where these communications are related to the negotiation and settlement of trade transactions in larger organisations, it is difficult to ensure that all personnel have access to the full current picture. Many communications are really related to specific transactions rather than the wider scope of relations between the parties but are ineffectually indexed, if at all, to specific transactions.